Tax returns are filed from several sources, including through the a federal or state electronic filing program, directly from taxpayers via tax preparation software or paper-based returns, or bulk-filing from tax preparers and data-entry vendors. The government tax agency handling the filings, such as the Internal Revenue Service (IRS) or state revenue departments, typically enters the information from the tax returns for each filer into their internal database, and then human auditors may review the data to identify fraudulent or inaccurate returns.
The conventional auditing process, however, provides little collaboration or validation from other tax agencies and data sources, and as a result is less likely to capture multi-state tax fraud campaigns. For example, a person may attempt to defraud multiple states by filing tax returns in ten different states under a social security number for a deceased person. Self-contained systems of each state agency are not able to identify that refunds are being requested under the same social security number for multiple different states, and may be unable to connect with any databases that store information about the deceased. Furthermore, this type of fraud may not be captured by the traditional auditing process, if none of the flags are triggered. For example, if the fraudulent returns are each claiming a modest refund, e.g., $1500.00 or less, the returns may fall below a threshold that triggers a flag for an audit, and the refunds may be paid.